The Rupp Report: Another Trick-or-treat From The Bankers

Jürg Rupp, Executive Editor

At the end of 2008, the Rupp Report wrote the following words: "If future generations are looking
back in the history books, they will probably see 2008 described as an historic year. They also
will notice that mankind didn't learn anything but to forget."
(See "
The
Rupp Report: Farmer Or Hunter?"
TextileWorld.com, December 9, 2008.) Of course, these words were based on the
unbelievable shock of the financial crisis, caused by some "global leading banks." And,
unfortunately, it seems that these sentences — written not quite four years ago — were more than
true. It seems, too, that the more computers are increasing their capabilities, the more the human
brain is losing its ability to remember bad things.

Insiders Know More But the facts are even worse, and they correspond with the financial crisis that happened
when banks — in a Ponzi scheme that eventually collapsed — handed over the responsibility with
so-called "structured products" to other institutions and, finally, to the people. The rest is
history.

However, this new story is beyond the imagination of Joe Blow next door: A number of major
international banks are accused of manipulating the London InterBank Offered Rate (LIBOR) interest
rate from 2005 to 2009 using false information in order to disguise their actual funding costs. The
United Kingdom-based Barclays Bank had conceded the first financial institution misconduct of some
of its dealers and was fined US$500 million. Financial experts estimate that the institutions
involved in the scandal could have to pay fines up to $14 billion through 2014.

The LIBOR Interest Rate The term LIBOR is quite known among business people, especially those borrowing funds from
the bank to, for example, build a house. The LIBOR
(see box below) is calculated once a day in London and displays on what terms banks lend
money to each other. It is based on information provided by important financial institutions and
serves as a reference for loans to businesses and individuals, and other financial transactions
amounting to $360 trillion per annum.

From 2007 to 2009, several banks apparently manipulated the rate to set in order — in
reality, to disguise — their financing costs and make additional profits. The Governor of the Bank
of England, Mervyn King, in a letter to leading central bankers, had to urge central bank circles
to "radical reforms in the Libor system." Now, the credibility of the LIBOR and the banks has been
totally damaged.

No Reaction It is just about disgraceful that four years ago, the U.S. government apparently pushed the
Bank of England to make changes in setting the LIBOR. There is some evidence that in June 2008,
U.S. Treasury Secretary Timothy Geithner, at that time head of the Federal Reserve Bank of New
York, urged King in six e-mails to strengthen the credibility of the LIBOR rate, and there was no
reaction from the Bank of England. In his messages, Geithner suggested introducing new testing
procedures to fix the LIBOR, also in order to avoid unintentional or deliberate misreporting.

How To Control Power? As a matter of fact, it is not easy to monitor the inner circle of global financial power.
One possibility might be to abolish the LIBOR. Barclays and other British banks cheated not only
millions of customers, but also the federal controlling authority. The authority only started its
action after repeated investigations from the U.S. government. The questions remain: how to control
the fairly lawless square mile of the City of London, which seems to be the center of the scandal;
and whether one can even rely on information from the same source. In the wake of the scandal about
the manipulated LIBOR rates, one is left more or less helpless.

Jeopardized Economy One may say that writing about financial problems is not the duty of the Rupp Report.
However, the whole global textile industry, like any other market segment, is very much dependent
on trust and faith. As the Rupp Report informed its readers about the recent ITMA Asia + CITME
2012, the Asian business for textile machinery is heavily disrupted by European political and
financial problems. After the already mentioned problems of 2008 and 2009, many textile companies
suffered — and are still suffering. Many textile companies rely very much on loans from the banks.
So the statement from independent prominent textile entrepreneurs that "we are not dependent on
bank money" is gaining more significance. It is somewhat of a horror scenario that the banks are
getting cheap money by manipulating interest rates, and the companies on the other side that fight
to survive are financing this system by paying phony calculated interest rates.

Experts doubt that anything will change in the City of London, where bankers and politicians
have been entwined for centuries. In retrospect, the investigation by the Parliament at Westminster
of the LIBOR scandal appears to include a long list of omissions and misunderstandings. However,
there is some hope: British parliamentarians are pushing the government to abolish "the gentleman
approach" of the City of London. The next hearings will be in September 2012.

The London InterBank Offered Rate, or LIBOR, is the average interest rate at which a select
group of large, reputable banks that participate in the London interbank money market can borrow
unsecured funds from other banks. There are many different LIBOR rates (maturities range from
overnight to 12 months) for numerous currencies, including U.S. dollars. In the United States, the
most common LIBOR maturities used in pricing loans are for one, three, six and 12 months.

Back in the mid-1980s, the world banking system adopted the LIBOR as a much-needed benchmark
for short-term, interbank loans. The LIBOR rates are now internationally recognized indexes used
for pricing many types of consumer and corporate loans, debt instruments and debt securities across
the globe. For example, LIBOR is used as an index for the vast majority of interest-only loans in
the United States. LIBOR rates are fixed every British business day by the global media corporation
Thomson Reuters, in association with the British Bankers' Association (BBA), a said-to-be nonprofit
trade association.
August 28, 2012